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I was reading the Wall Street Journal this morning when I came across a very insightful piece about how food and water policies in Egypt and Syria have ultimately led these nations into revolutionary chaos. The tragic outcome of economic policies designed for political control have caused Egypt to spiral into a country in political and economic ruin. In Syria, the government has misdirected the country’s scarce water resources so poorly that a drought seven years ago caused the country to nearly run out of water and hurled farmers into refugee camps where revolution started brewing. Wide use of food and fuel subsidies along with other state sanctioned economic policies that shielded these countries from world markets have set the stage for political collapse.

What we need to ask ourselves, is how can foreign governments be convinced to embrace free markets? Why is it so tempting for countries to impose artificial prices and unwise policies when it has been shown to make conditions worse in the long run? It is not only a problem in the middle east but in the United States as well, to a lesser extent. Why does the United States have sugar subsidies? Why do we have massive government controlled crop insurance programs when food prices are at historic highs? Why has our country pushed corn-based ethanol, when it has not been proven to be economically viable without government subsidies? It’s silly we still are holding on to many of these flawed policies. It’s proven that to maximize consumer and producer surplus that government intervention should be kept at a minimum. In the case of these middle eastern countries in question, the tinkering by governments for the past few decades has caused more problems than it has solved. In the United States, we allow corporate lobbies to write our agriculture legislation in order for their industry to collect taxpayer assistance that in most cases, is a wasted dime.

I ran across this post at the Institute for Energy Research about the price controls placed on New York and New Jersey gasoline markets. Hurricane Sandy both decreased the supply of gasoline to the markets and increased the demand. So naturally, the price would rise under an unhampered pricing system. This is a classic Principles of Economics problem.

However, government-imposed price controls have left gas shortages, long lines, and rationing. Sounds familiar, right? (Think Nixon and the 1970’s)

The most interesting part of this post was his explanation of the expectation of future price controls on gasoline markets today. Even if state governments don’t impose price controls, the mere expectation of those controls will lead gas suppliers to not stockpile a lot of gas for a potentially severe future supply shock, adversely affecting the consumers when the supply shock comes.

Some critics have objected to the above type of analysis, claiming that in the immediate aftermath of the hurricane, the transportation infrastructure (such as bridges and ports) was so severely damaged that the local gasoline supplies were effectively fixed. Thus, these critics say, the price controls served a useful social purpose, in preventing a few gasoline retailers from getting rich at the expense of their unfortunate neighbors.

Yet this is a very shortsighted analysis, and fails to appreciate the versatility of a truly free market. Suppose for the sake of argument that Hurricane Sandy completely isolated New York City from the outside world for a few days. Even so, theexpectation of anti-gouging rules made the New York residents worse off.

Think of it this way: Meteorologists had given several days’ warning that the “Frankenstorm” was going to be a big one. Residents were stocking up on flashlights, batteries, bottled water, and so forth “just in case.” If we actually enjoyed economic liberty in this country, then the gasoline retailers in the area would have thought, “Hmm, if this storm is as bad as they’re saying, we might be cut off for a few days, and the subways might be flooded. The market in that scenario might bear a price of $7/gallon or even higher. So it makes sense for me to carry a much bigger inventory than I normally do. If the storm is a dud, then I’ll be out a bit of interest I could have earned on my capital, while it’s tied up in the massive inventory that I have to gradually unwind. But if the price does happen to skyrocket, I’ll make a killing.”

Thus, even the amount of gasoline on hand when Hurricane Sandy struck, was itself lower because people in the industry knew full well that the knee-jerk government response is to crack down on “gouging” in such situations. There was not as much incentive to build up large stockpiles in the week before the hurricane hit, as there would have been had retailers believed they actually owned their property and could charge their customers what they wanted for it.

Interestingly enough, under presidents Nixon through Clinton, the U.S. saw great growth in economic freedom (according to the 42 criteria used by the Institute). Since Bush Jr. took office and through president Obama’s presidential tenure though, that freedom has been receding.

For a country that is dealing with a massive financial burden, it would not be in our best interest to allow such a decline to persist. The lower the U.S. sinks in the global rankings, the more enticing the freer countries become. If large amounts of individuals leave the U.S., less people are left to pay for the debt and the bills that the country has coming. In order to best tackle the debt burden, it would be best if we could attract more individuals to the country and create an environment for them to thrive as entrepreneurs and employees. But this outcome is unfeasible if the bipartisan spendthrifts in Washington continue leading us in the same manner they have been.

As the dollar declines, and the debt racks up, expect more labor to migrate to more free countries or countries with more fiscally responsible governments. It is already happening in Europe.

Hopefully the Obama administration will take the initiative to tackle the debt head on. Spending has to decrease. Austerity measures have to come. Monetizing the debt will lead to high inflation and default will lead to much higher interest rates and less future borrowing. At least one of these outcomes is inevitable.

What’s going to happen in the next 4 years under President Obama? Who knows..

What lies ahead are opportunities to act in favor of sound economic progress and opportunities to climb back up the freedom ranks. Long term growth depends on this. Many of these decisions will not be popular, but president Obama has the opportunity to move the country towards a more sustainable path in these next few years.

If you are tempted to conclude that because of Hurricane Sandy, the affected regional economies will be better off because of the spending that needs to take place to restore them back to pre-Sandy conditions…don’t.

Prosperity comes with greater goods at lower real prices over time. Wealth is ‘stuff’. More stuff and/or better services over time raises your standard of living.

If someone were to destroy all of your stuff, you would not be better off. If you were to buy brand new goods to replace the ones that were destroyed, then that producer would be better off, but at the expense of the other producer who would have gotten your money if your goods werenot destroyed. There is a net loss to the community of producers and consumers when your stuff is destroyed. That is pretty much indisputable.

The same goes for whole economies. When a hurricane strikes a region and levels the buildings and structures, they call it a catastrophe for a reason. It is bad.

But in addition, the spending and energy and time that is necessary to restore the region to pre-catastrophe condition could have been used to add to the wealth of the region. Now, instead, it must be used to restore it back to its previous condition – back to step 1, so to speak. There is no way that it could be better off, speaking in terms of standard of living.

If destruction were the key to prosperity, then why wouldn’t we spend all of our time destroying things?

I read this morning in The Atlantic an article describing a strategy to assess teacher performance in Primary education that has been gaining momentum and attention lately. The basic idea is that the students – the ones who have to study under the teacher for several months – are the ones that assess the teachers based off of a comprehensive questionnaire regarding teaching performance and classroom atmosphere. Sounds novel, right?

There is always difficulty in making accurate inferences from such surveys as the possibility to “christmas tree” the answers is present with the students. And giving the surveys sufficient weight in wage and employment decisions will create an incentive for the teachers to appeal more to the year-end surveys than to the students’ academic development. Such is the case many times with the incentives regarding standardized tests.

Luckily, students seems to be taking the test pretty seriously:

“There are some students, knuckleheads who will just mess the survey up and not take it seriously,” Ferguson says, “but they are very rare.” Students who don’t read the questions might give the same response to every item. But when Ferguson recently examined 199,000 surveys, he found that less than one-half of 1 percent of students did so in the first 10 questions. Kids, he believes, find the questions interesting, so they tend to pay attention. And the “right” answer is not always apparent, so even kids who want to skew the results would not necessarily know how to do it.

…At least for the first ten questions.

If the education establishment wants to move in the direction of teacher assessment via student surveys, then I think this is a good direction to go. The trick is creating questionnaires that ask the right questions and that provide accountability even if the teachers give in to teaching just for the sake of the year-end surveys:

The survey did not ask Do you like your teacher? Is your teacher nice? This wasn’t a popularity contest. The survey mostly asked questions about what students saw, day in and day out.

Of the 36 items included in the Gates Foundation study, the five that most correlated with student learning were very straightforward:

To add on to this, I think a short, year-end testing of teachers in their respective subjects could be helpful. Teachers need to be competent in their areas if they are going to develop thinking skills among their students. This allows them to communicate better and push their students to higher levels as they, themselves grow to learn more about what they are teaching. The results of such tests would be held privately and if the teachers perform poorly, then the school can suggest a training program to complete and then re-assess after that program is complete. If no improvements are made, then they are let go.

Moving towards excellence is always the right direction to go. There are many ways of going down that road and I think that this will prove to be a useful tool in assessing teachers and giving students a voice for positive change. We can expect there to be a lot of friction from teachers’ unions as dismissals increase from the survey results , though. It might be the time to reign in some of the power wielded by these unions in an attempt to foster long-term excellence.

The winners of the Nobel Prize in Economics were just announced this week – Alvin Roth and Lloyd Shapely. Their research had to do with market structures and pairing; that is, how to optimally organize and pair exchanges in a market. Their research utilizes a lot of game theory and covers kidney markets, education markets, and even marriage [markets?].

Here’s a short video that has Doctor Roth explaining a little bit of how this idea is applied in the kidney markets. (He appears at around 1:10 in the video)